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Is Square about to ruin the Afterpay party?

Source: Company presentation

The market may be pushing higher today, but the same cannot be said for the Afterpay Touch Group Ltd (ASX: APT) share price.

In early afternoon trade the payment solutions company’s shares are down 0.5% to $17.67.

Investors may be responding to an announcement out of fellow payments company Square overnight.

On Thursday the San Francisco-based company announced the launch of Square Installments, which could be a threat to the Afterpay service.

According to the release, much like the Afterpay platform, the Square Installments “service provides sellers with access to a powerful tool for growing sales that has traditionally only been available to larger businesses. This new payment method gives their customers the freedom to pay for a large purchase by splitting it into easy, fixed monthly payments.”

Users of the service will be able to pay for the product or service over 3, 6 or 12 months, for qualifying purchases between $250 and $10,000. The service is currently available in 22 U.S. states.

Unlike Afterpay, though, the service is not interest free and rates range from 0-24% APR.

One example given on the Square website is the purchase of a US$1,800 sofa.

Over three months the customer would expect to pay $605 per month, equating to a total of U$1,815. Over six months they would pay US$313 per month, totalling US$1,878. And over 12 months they would pay US$165 per month, which equates to a total of US$1,980.

Should you be worried?

One broker that isn’t overly concerned is Goldman Sachs. It has retained its buy rating and lofty $26.15 price target on the company’s shares.

It stated that: “We think APT’s strategy in the US is clear (it’s a very simple product), targeted (specific to Fashion and Apparel) and a strong value proposition (consumers who pay on time get the service for free). As such we see no reason to change our current forecasts for APT in the US market.”

The broker did warn that it expects more competition to emerge in the near future, with companies like PayPal and Klarna likely to respond in some way.

For now, I agree with the broker and see Afterpay Touch as a good long-term investment. Though, it may be prudent to hold out for its next U.S. update before investing.

What about Zip Pay?

If Square were to launch the product in Australia then I would be concerned for Zip Co Ltd (ASX: Z1P) as it is a very similar offering. But I suspect a potential launch over here would be some time away.

Finally, if you like shares like Afterpay Touch then I think you'll love this top tech share which has been given a buy rating.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PayPal Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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